Morningstar Credit Ratings looks at approvals of novel medicines by the Food and Drug Administration as a proxy for innovation in the brand name pharmaceutical industry. The branded drug industry hit its stride having obtained 45 novel drug and biologics approvals from the FDA. This followed a down year in 2016 when only 22 new drugs gained regulatory approval. Out of this number, companies rated by Morningstar Credit Ratings accounted for 23 novel treatments, around one half of the total, with AstraZeneca leading the group with four. We understand that there can be substantial volatility in the approval numbers from year to year, so we recognize trends over multiple years as more insightful.

Along these lines, we call out two notable approval trends since the FDA's drug approval foundation was established in 1992 with the enactment of the Prescription Drug User Fee Act. Despite early success with the law and subsequent amendments, a negative trend arose after Merck's voluntary market withdrawal of COX-2 inhibitor Vioxx in September 2004 due to cardiovascular safety concerns. In light of extensive political and consumer fallout from this event, the FDA needed to reassess and develop new safety standards to ensure that the issue was not repeated. As the agency and Congress worked toward this goal, the average number of drug approvals per year fell to 23 in 2005 to 2011 from 33 in the 1996 to 2003 period.

The second trend that we highlight emerged following the passage of FDA Safety and Innovation Act in 2012, which added the Breakthrough Therapy designation, a fourth approach to the FDA approval process beyond existing priority review, accelerated approval, and Fast Track designations. Likely helped by this new pathway, the average amount of FDA approvals jumped to 36 annually in 2013 to the present. In 2017 alone, Breakthrough therapies represented almost one third of all approvals.

Clearly the number of approvals in a given year is heavily dependent on quantity of new drug applications submitted to the agency for review. Presently, Morningstar-rated entities have 13 candidates filed or soon to be filed with the FDA. Topping this list are two companies that we see as having the greatest drug patent expiration risk in the industry, Amgen and Eli Lilly. With pending applications considerably pared back from 23 that were sitting at the agency at this time last year, it is probable that total drug approvals in 2018 reverts to the mean or maybe lower. Still, given the present positive trend, we think a return to the dark ages seen after the Vioxx debacle is highly unlikely any time soon.